World Bank president Robert Zoellick has warned that the deepening economic woes in the United States and Europe have pushed the world into a new "danger zone".

Mr Zoellick also says a lack of confidence in America's economic leadership during the debt ceiling impasse with the US Congress was largely responsible the recent heavy falls on global share markets.

And he urged international leaders to move quickly to restore the crisis in global confidence after Standard & Poor's removed America's AAA credit rating.

"I think we are entering a new danger zone and I think that confidence in economic leadership has been slipping and it will be important that the primary economic actors take steps both short and long term to restore that," Mr Zoellick told reporters after addressing the Asia Society in Sydney last night.

"The challenge has been for understandable political reasons, the European decision mechanism has continued to muddle along and put together packages that while are significant in their political difficulty, have not matched the test of the economic need and that, I think, contributed to the weakening of confidence."

Mr Zoellick also warned policy makers to continue foster free and open markets to ensure that protectionism does not re-emerge.

"In the short term it will primarily be dependent on actions such as that from the European Central Bank but over time it will require attention to some of the fundamentals and those fundamentals not only deal with sovereign debt and the challenges of basic competitiveness but they also deal with putting in effective growth strategies," he said.

"Given the phase that we are now moving into we could face increased temptations of protectionism and the best defence against protectionism is to be on offence by opening markets."

The world bank chief said while he expects the world to move toward a system of multiple reserve currencies, the US dollar will probably remain the principal one despite the Standard & Poor's downgrade.

And he signalled that China might not be prepared to pump additional stimulus into its economy, given rising inflation, and a possibly overheating property market.

The intervention of the Chinese government in 2008 and 2009 insulated China from the global downturn and in turn stimulated demand for Australian resources.

"China is totally capable of managing this but I think one of the side effects of the policy implemented a few years is that there are going to be some bad loans from the investment stimulation. I don't think it's got the same freedom of that degree." Mr Zoellick said.

But he highlighted the strengths of the Australian economy, which avoided the 2009 global recession because of structural reforms.

"Australia is in a much better position than other developed countries in part because Australia undertook a lot of the structural reforms," he said.

"Whatever the policy decisions, and political decisions in Australia, it's in a better position along with the fact it's continued to pursue an open trade policy and take advantage of its position in the Asia-Pacific."

ABC (Moderator):

DethLok:

15 Aug 2011 8:55:57am

USA should live within its means.Printing more money is what Germany did after WW1, what Zimbabwe has done, and resulted, for them, in hyper inflation.US should re-raise taxes on the wealthy and cut military spending. Sadly, all the politicians running for election there are promising lower taxes and cuts to welfare instead... It's very odd. And it looks like it'll get worse, globally, before it gets better, if it does...

din:

tom:

15 Aug 2011 8:56:56am

The solution is simple economically but difficult politically. The united states' biggest enemy is their tax system. While other countries have taken steps to revise their taxation system to remove loopholes/fairer/easier/etc the United States has actually gone backwards.Now the US has a situation where the top 20 businesses in the US (keeping in mind Apple alone is worth ~500bn, Microsoft ~300m and IBM just in front) pay 0 tax every year thanks to a bunch of loopholes. Close these loop holes and implement a 1% tax increase on the super rich as Obama proposed and congratulations the US just wiped out their debt in a year.However getting these sorts of measures approved when the mega-rich tend to favour the republicans and channel masses of finances into their campaigns against such changes.

Shalashaska:

What steps should be taken to restore confidence in America's economic leadership?

America showing economic leadership for a start

Rather than continuing the fraud that caused the GFC and continued since. TARP made things worse, QE1 and QE2 made things worse. Trying the same stuff again will make things worse.

They need to take their medicine: cut the size of government, cut spending, raise taxes, let too big to fail banks fail, stop throwing money out of helicopters, stop expecting to be able to "pay later" for everything, stop marking to make believe, stop painting the fantasy that their economy is still growing. The only reason it seems that way is because they printed a few trillion dollars - which only made their debt grow.

They are over leveraged and running out of time. The market is beginning to pay attention to this fact.

Robbie:

ron:

15 Aug 2011 12:36:37pm

Remove greed from the equation.

It is the investors which are creating problems by pulling out.

The reality is that over time all will return to normal. It happened after the great depression and will happen again. It is the panic merchants who fear they will lose their millions that turn a ripple into a tsunami.

As long as the world's economy is dominated by the greedy who scare easily at the (potential) loss of their fortunes, there is little that can be done to stop it happening.

drew:

15 Aug 2011 9:36:14am

You're talking about two different stories here.

1. our govt. debt is incredibly low (and this is all honesty is not a concern - ie it's a bit like earning $100,000 pa and having a $9,000 debt); but 2. you are absolutely correct about the credit card - if you are talking about our private debt.

Private debt has spiralled out of control. Here we are talking about record mortgages, record debts for education (ie HECS), and high levels of debts on credit cards/ personal loans. Too much is paid for by our private debt.

The economy cannot keep being sustained by debt. We need sustainable growth and productivity. This will mean the inevitable slow downs in the short term (which we are already seeing) - but this will be far better than the alternative.

DanD:

15 Aug 2011 11:47:04am

I'm by no means Islamic, but I do think they may be onto something with their banking system in that they are not allowed to charge interest on loans (if I haven't misheard that!). Interest is what is killing us... The Federal Reserve bank in the US prints the country's currency, however they print it at a 1% interest rate, so for every dollar printed the US then owes $1.01 to the fed... It doesn't make for good economics to be printing money at a loss, and then spending it on frivolous things like invading other countries while destabilising your base work force back home. Sure it might not be the most popular decision, but to charge higher taxes on the wealthy & corporations would be a great start; as Adam Smith said "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion."; "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

Hankering:

15 Aug 2011 8:14:45am

It is too late. We are seeing history repeat itself. Have we forgotten the great depression started in 1925 and came to a head in 1930. This GFC started in 2008 and if it follows that last collapse, should hit the world hard around 2013. We will then have a war to make all other wars look like a picnic.

Winston Smith:

15 Aug 2011 8:55:36am

When all else fails we will go to war!This has been coming for a long time.The middle class are being economically raped by the banksters that lobbied governments to deregulate the financial system in order for them to make off with the piggy bank.It's just as well the West is now implementing draconian new security measures in the wake of the London riots.Why?Because the next revolution will be the 'ordinary man' in the street who has had his pension, retirement savings and supperannution stolen and is being crushed by enforced austerity measures.By the time people really wake up, the establishment will have created a massive security network and passed new laws banning any kind of government protest or criticism.Yes that's right. Those who dare to object to being robbed by the criminal banksters who created this mess will be labelled terrorists!And when it all gets too much to contain we will have a war to distract us and keep us patriotic and subservient to our masters!

shayne:

15 Aug 2011 9:40:35am

"we will go to war"

who is "we"? and war against who? This isn't 1925, and Bush, Blair and Howard already cried wolf on the WMD thing, so that's out. we could go pick a fight China, I guess, but what do they have that we want (and could take)? Maybe more wars in the ME?

I'm guessing by your post you lost your dough in the GFC. Trouble is Winston, the youth - who are now struggling with housing affordability, are paying to clean up the environmental mess, are coming to terms with the disaster capitalism has turned out to be - have no sympathy for you.

Your 'criminal banksters' are basically faceless corporations created by the generations before us insatiable desire to consume and accumulate. many of us here in oz have our superannuation (involuntary by the way) tied up in said corporations, and therein lies the problem.

Andy:

15 Aug 2011 12:05:59pm

Shayne - it doesn`t matter who the war is against as long as it happens. Wars stop goverments and banksters from getting their come uppance. When you have to tell someone you spent all their super you better have a scapegoat to pull out of the hat to divert a persons attention. So let`s start a war with China or whoever but a war will come. Look it was easy to get people into Iraq over non-existent WMD`s so another straw man will be stood up and everyone will run and fight it too. Check your history books, this stuff has been going on for ages.

Joe Blow:

Sweeney:

15 Aug 2011 8:21:13am

The crooks who gave us the GFC are still alive and well and have been joined by banks and speculators who drive currencies and commodities in huge swings at their whim. Might have to let a few countries go broke and then see if world leaders get serious about the problem

permasculptor:

15 Aug 2011 8:25:38am

None! America is going down and anything that prolongs it,s demise will ultimately make things worse for the rest of the world. They have been irresponsible and greedy for to long. Just who are we talking about ,who are americas economic leaders ? the same people that are committing ecocide in my oppinion.

Ondocfarm:

15 Aug 2011 8:46:48am

The foolishness of John Maynard Keenes Economics is now at its end. Von Heyek economics is now in play... Euro has one central bank and each country cannot print fiat money...as the USA has done to the deficit of US$16 trillion. Where do you look for the cause? USA banks, its Banking dominated Federal Reserve and the greedy bankers who created the Over the Counter derivatives now estimated to be some US$817 trillion.. which have nil substance behind them. That is what has destroyed the USA and Euro..so who is left holding everyone's bonds? CHINA, India, Brazil, Russia & South Africa! Oh dear!

Redstar:

john d:

15 Aug 2011 9:08:06am

Sack the chairman of the Federal Reserve, Geithner, and all the other ex wall st bankers (foxs) currently raiding the hen house. Reintroduce Glass-Steagull. Bring to account the bankers and politicians who have not only created this mess, but have allowed it to grow. Ban derivatives, and other complicated financial instruments that are high risk to everybody, except the wall st a-hole who create's them, and sell,s them to suckers with government support.I could go on, but that is a start...

sinesurfer:

Son of Cicero:

15 Aug 2011 9:14:56am

What have we learned in 2,066 years?

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

- Cicero - 55 So, evidently nothing

Did you know that if you laid all of the economists and politians end to end, they still wouldn't reach a conclusion?

hackette:

15 Aug 2011 1:13:43pm

If only this were a true quote. It's from a novel about Cicero called A Pillar of Iron (1965) by Taylor Caldwell.How about a real Cicero quote like 'Salus Populi Suprema Lex Esto'- Let the welfare of the people be the ultimate law.

JJ:

15 Aug 2011 9:15:22am

Maybe we need to have a major global financial implosion? Our current financial model is not workable and creates massive unbalancing of wealth. In days gone by, wealth was a measure of how hard a person worked, not how much they speculated. The current model creates a lot of tension between the haves and have-nots, causing the issues we see on the news across the world. It also creates the poverty gap that middle class falls into when cost of living skyrockets for anyone not on welfare, NZ is a case in point. Anyone not on welfare, but not very wealthy, you can't subsist on the average wage levels of around $32k pa when the COL is closer to 1.8x a single income. Australia is one of the few countries where COL is such that someone on the average wage can afford their COL, albiet with little left over in savings and provided they haven't dug themselves into debt from living beyond their means.

gc:

Can, or should you, try to restore confidence in something that is fundamentally flawed and broken ?

All of the Western countries have borrowed more from the future than they can pay back. Even if there were plentiful supply of cheap oil and no environmental limits to growth.

But, we face higher energy costs and we cannot afford to exploit our life support system indefinitely. We have crossed planetary boundaries ( see Rockstrom et al, Nature 2009 ) and even if we decide to ignore those limits, suchas climate change, nitrogen cycle and biodiversity loss, nature will not.

We need to start living within our means on a finite planet. Zoellick and his fellow lunatics are calling for indefinite growth

bunyip:

dean:

15 Aug 2011 9:48:53am

maybe it could look to its own one dollar bill & study the graphics that it is supposed to emulate. Their eagle has lost its way, like their supersonic plane, it is not able to soar at the moment, the storm & clouds have gotten the better of it...too much arrow gazing not enough on the olive branch.

Nor should they favour the rich over the poor, less hamburgers & steaks more humble pie. There are lots of things I love about America but I do think that would help.

Mike Cranny:

15 Aug 2011 10:06:37am

A major overhaul is needed to their broken federalism where jurisdictional disputes between the states and the federal government has produced weak and contradictory policy and comes at a cost of around a trillion dollars a year. It's time to re-write the constitution to produce the United State of America with just one legislature, the congress, jettisoning the senate and the state governments. By giving city governments the role of service delivery, local communities will be empowered with more resources at the front line. The entire nation will be more cohesive and benefit enormously from a massive productivity dividend. It's restructuring that Australia could do first, showing our friends how it can be done.

jo:

Trevor:

15 Aug 2011 11:58:06am

There are some very simple reasons why the world economies are so sick! The USA has been living on credit for too long, and it is PAYBACK TIME. I travelled around 12 different countries in Europe recently, and except for Germany, every other country just wants the "easy life", with a 3 hour siesta at lunchtime, and early retirement with a huge pension. This is totally UNSUSTAINABLE! AND, I have now been living and working in Taiwan near China, for 9 years. The work ethic in Asia is incredible. Get to the office at 9 am and work until 8- 10 pm with no complaints, and just happy to have a job. They have a small pension and unemployment benefit, and treat work as a priviledge, not a punishment. Japanese, Koreans, and all Asians here I have met are the same! I am an Aussie, and love OZ, but God help Australia when the mining boom finishes!!!

stormgal:

15 Aug 2011 1:40:16pm

Well Trevor, if you enjoy being a corporate slave working long hours to make the rich man richer, that's your prerogative. But please don't think for one second the rest of us see things the Asian way. I for one love spending time with friends and family, and for normal people, they go first.

Martin:

blax5:

15 Aug 2011 1:49:36pm

The question is probably put wrongly. "Restoring confidence in America's economic leadership' sounds like there is still leadership and only confidence is lacking.

In truth, the American leadership has fallen away through a variety of mis-developments, and one could conclude that the underlying ideology is faulty. What exactly is 'the economy' supposed to deliver? Is 56 million on food stamps a good delivery?

The question should have probably been what can be done to restore America's economic leadership. That would require the change of so many parameters that it looks extremely improbable right now. Before any change could happen there needs to be an acknowledgement that something has gone wrong, which is not there. The biggest item seems the military spending, and as long as that is more important than delivering on main street, there is not much wriggle room. Outside America the voices grow louder that not much can be achieved without tax increases and these cannot be done. So, America is no longer regarded as the economic leader.

Free trade is the oldest argument in federal politics and the issue that literally defined the federation era but opposition exists to the TPP, courtesy of the Investor-State Dispute Resolutions clause.